Failure to Cut Debt Lifts Builder Yields Above 20%: India Credit

Women walk past the DLF Emporio shopping mall in New Delhi. Total profit at India’s five biggest developers, with DLF being the biggest, fell to the lowest level in at least a year in the three months ended Sept. 30, data compiled by Bloomberg show. Photographer: Graham Crouch/Bloomberg

DLF Ltd., the largest builder, had liabilities minus cash
of 242.7 billion rupees ($4.7 billion) last quarter, an all-time
high, data compiled by Bloomberg show, as the company delayed
asset sales. Net debt at Godrej Properties Ltd., the fourth-biggest by market value, reached unprecedented levels as the
central bank raised interest rates to a three-year high.
Developers sold debt at between 18.5 percent and 23 percent this
quarter, National Securities Depositary Ltd. data show.

India’s real-estate industry needs to repay 1.8 trillion
rupees of debt in the next two to three years and the risk of
defaults will increase, according to U.K. property broker Knight
Frank LLP. Los Angeles-based KB Home’s 2015 notes yield 9.3
percent and 2016 dollar debt of China’s Agile Property Holdings
Ltd. offers 13.3 percent.

“Debt is rising to fund the core business in the absence
of operating cash flows,” Bhaskar Chakraborty, an analyst at
Mumbai-based brokerage IIFL Ltd., said in an interview on Nov.
30. “The next financial year is going to be worse than this one
for builders, seeing the state of the industry with dwindling
sales and high interest costs.”

Total profit at India’s five biggest developers fell to the
lowest level in at least a year in the three months ended Sept.
30, data compiled by Bloomberg show, as the slowing economy and
rising interest rates hurt sales.

Asia’s third-largest economy expanded 6.9 percent from a
year earlier, the smallest advance in more than two years,
government data on Nov. 30 showed. Profit growth at the 30
companies that make up India’s benchmark share index slowed to 7
percent last quarter from 17 percent in the prior period.

Falling Demand

Property demand has slumped in India’s biggest cities as
the Reserve Bank of India raised borrowing costs by 375 basis
points, or 3.75 percentage points, since March 2010 to slow
inflation. The average mortgage rate at Mumbai-based Housing
Development Finance Corp., India’s biggest mortgage lender, is
currently 16.5 percent, according to the company’s website.

Central bank Governor Duvvuri Subbarao last raised the
repurchase rate by 25 basis points to 8.5 percent on Oct. 25,
the only policy maker in the biggest emerging markets to
continue raising rates this quarter. Brazil has lowered its
benchmark rate by a total 100 basis points since August to 11.5
percent.

‘Ridiculous Proportions’

Home sale registrations in Mumbai, India’s most-expensive
real-estate market, fell 25 percent in October, according to
Kejal Mehta, an analyst at brokerage Prabhudas Lilladher Pvt.
Sales in New Delhi and its surrounding areas declined 18 percent
to 18 million square feet in the quarter ended Sept. 30, while
unsold units climbed to a record 221 million square feet,
according to Liases Foras Real Estate Rating & Research Pvt.

Higher interest rates are also boosting developers’ debt
costs, adding to the pressure on profits. DLF, based in New
Delhi, paid a record 5.26 billion rupees of interest in the
third quarter, up from 4.96 billion rupees in the prior period,
data compiled by Bloomberg show. Similar costs rose 11 percent
to 1.91 billion rupees for Housing Development & Infrastructure
Ltd., the nation’s third-biggest builder.

‘Under Pressure’

Kumar Urban Development Pvt. and Neptune Developers Ltd.
borrowed at rates from 19 percent to 20 percent in the past
three months, according to data from the National Securities
Depository. Total net debt of 11 Indian developers rose 19
percent from a year earlier to 403 billion rupees last quarter,
according to Mumbai-based Edelweiss Securities Ltd.

“The majority of the companies will be under pressure to
generate enough cash flows to service debt obligations,”
Aashiesh Agarwaal and Adhidev Chattopadhyay, analysts at the
brokerage, wrote in a Nov. 21 research note.

Profits at Indian developers shrank 23 percent last quarter
from a year earlier, after falling 20 percent in the three
months ended June 30, according to Edelweiss. Net income at DLF
slid 11 percent to 3.72 billion rupees in the quarter ended
Sept. 30 from a year earlier, the company said in a stock
exchange filing on Nov. 10.

Challenging Environment

“The environment is quite challenging and continues to
deteriorate and our results basically reflect these
conditions,” DLF’s Executive Director Saurabh Chawla said in a
conference call with analysts on Nov. 11.

The average cost of five-year credit-default swaps on the
debt of seven Indian borrowers jumped 191 basis points this year
to 390 basis points, according to CMA, which is owned by CME
Group Inc. and compiles prices quoted by dealers in privately
negotiated markets. The swaps pay the buyer face value in
exchange for the underlying securities or the cash equivalent
should a company fail to adhere to its debt agreements.

Yields on India’s 10-year sovereign bonds gained 75 basis
points this year, the biggest increase after Vietnam in Asia.
They fell two basis points to 8.63 percent in Mumbai today,
according to the central bank’s trading system. The extra yield
demanded by investors to hold the notes over similar-dated U.S.
Treasuries has widened 199 basis points in 2011 to 661.

‘Sword Hanging’

Rupee-denominated bonds are the worst performers this year
after Taiwan among 10 Asian local-currency debt markets tracked
by HSBC Holdings Plc. The notes returned 3.9 percent, compared
with the 19.3 percent earned by Indonesian debt. The rupee lost
4.8 percent this quarter, the biggest decline among Asian
currencies. The currency fell 0.5 percent today to 51.45 per
dollar.

“Debt at developers is still a massive sword hanging over
their heads,” Amit Goenka, Mumbai-based national director of
capital transactions at the Indian unit of Knight Frank, said in
an interview on Dec. 2. “Asset sales are taking place in a
large way as developers look to exit non-core assets and even
core assets that are non-performing.”

DLF is planning to sell “non-core” assets, Chairman K.P.
Singh said in an interview with Bloomberg UTV on Dec. 2. The
company aims to raise as much as 100 billion rupees from sales
of hotels and land and will use the funds to trim debt by 35
billion rupees this fiscal year. The company said today it sold
a 71 percent stake in an information technology park in northern
India to help cut debt.

Housing Development & Infrastructure is planning to sell
unfinished projects in Mumbai and South India, Hari Prakash
Pandey, a Mumbai-based vice president, said on a conference call
with analysts on Nov. 11.

“We are looking if we can exit from some of these
projects,” said Pandey. “The situation has become difficult,
with the RBI tightening interest rates. It is important to
protect our balance sheet and keep leveraging under control.”